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Monday, 2 November 2015

Oil price crash compels Nigeria to revise fiscal terms

A new report by Wood Mackenzie has stated that the slump in the price of crude oil has accelerated the need for Nigeria and other sub-Saharan African countries to carry out a review of fiscal terms, as they prepare to adjust to significant reductions in tax revenue.

According to Wood Mackenzie, the percentage of government share in hydrocarbon profits across sub -Saharan African countries (onshore 66.1 per cent; shelf 60.5 per cent; deepwater 61.6 per cent) is higher than the global average (onshore 57.6 per cent; shelf 58.3 per cent; deepwater 57.8 per cent) despite the challenges companies face operating in the region.

Wood Mackenzie further stated that the oil price decline has heightened the need for fiscal change in sub-Sahara Africa, estimating that Nigeria, which depends on oil and gas for 70 per cent of its revenues and other countries across the region will take around $50 billion less in hydrocarbon taxes in 2015 as oil companies’ budgets are forced down by the price drop.

With no increase expected in oil and gas production volumes, Wood Mackenzie insisted that future revisions of fiscal terms will need to strike the right risk and reward balance - incentivising investors to commercialise the continent's vast untapped resource base.

Director for sub-Sahara Africa Upstream research at Wood Mackenzie, Martin Kelly explained that less than 10 per cent of the 48 billion of barrels of oil equivalent (boe) discovered in sub- Sahara Africa over the last decade have reached final investment decision (FID).

“As a result, there will be little or no increase in production from new developments that offsets the loss of vital hydrocarbon tax earnings – Nigeria alone relies on the oil and gas industry for 70 per cent of its revenues,” Kelly said.

Principal Petroleum Economist for sub -Sahara Africa research at Wood Mackenzie, Ross Millan stated that since 2010, almost 20 countries have revised their fiscal frameworks.

“Throughout the process, we have seen two common themes emerging: tougher terms in response to previous exploration success and updated hydrocarbon laws to capture current industry trends, such as increasing focus local content, technological advance and new areas of exploration. In addition, increased state equity, greater local company participation and the profit-related production sharing contracts (PSCs) are some of the key changes we've seen widely introduced,” Millan said.

“A number of other nations have also announced their intention to overhaul fiscal terms and some already have legislation making its way through the parliamentary approval process. In many ways the lull in exploration activity and new project sanctions has provided governments with a unique opportunity to overhaul ineffective and potentially outdated fiscal systems before the next wave of investment," Millan added.

According to Wood Mackenzie, the percentage of government share in hydrocarbon profits across sub -Saharan African countries is higher than the global average, despite the challenges companies face operating in the region.

Kelly added that while the region has tremendous resource potential, neighbouring countries are in direct competition for international investment and must understand where the next round of fiscal changes could position them against their peers in the eyes of the global upstream industry."

Wood Mackenzie warned that the decisions taken today will have a huge impact on whether or not African nations can rely on lasting tax revenue streams from oil and gas production to support state budgets in the decades ahead.

"Finding oil is one thing, but getting it to market as a taxable commodity is another. sub-Sahara Africa has a tremendous opportunity to generate wealth from hydrocarbon resources in the coming years, but in order to do so need to ensure that future fiscal revisions strike the correct balance for investors between risk and reward " Kelly added.